Bonds of high-grade insurance giants including AllState Corp., Chubb Corp. and Hartford Financial Services Group are widening on fears that Hurricane Frances, the sixth tropical storm of the season, will inflict massive damages on the South Florida coast and trigger heavy insurance payouts. The fears come shortly after Hurricane Charley hit the opposite side of the state and cut a wide swath of destruction. Frances was bearing down on the mainland U.S. as BW went to press last week and was expected to make landfall by last Saturday.
Spreads on AllState's 5% of '14s widened by up to six basis points as of the middle of last week. Other insurance issuers widened across the board and spreads are expected to widen further amidst anxiety from the potential one-two punch from the hurricanes, said one trader. Insurance companies posted liabilities of roughly $7 billion after Charley, and Frances' potential path across urban southeast Florida has some investors fearing $20 billion in liabilities for the insurance industry, explained David Havens, executive director and analyst at UBS in New York. If Frances turns out to be a worst-case scenario, the immediate impact on pricing across the sector would be negative as companies repair their balance sheets, he noted. "But the secondary impact would be a depletion of capital and a reduction of underwriting capacity which would ultimately boost prices," he added. Havens highlighted that insurance spreads are currently tight on a historic basis and the third quarter can be difficult for companies because of natural catastrophes. Also, the tone for property and casualty insurance companies has shifted as companies are under increasingly competitive pricing pressures, he said, noting investors had already been taking chips off the table in the sector.
"The industry is not set to go out of business with one event, per se, but it is worrisome that we're only halfway through the hurricane season. The issue is, how many more of these can [the insurance companies] stand," stated Stan August, managing director in high-grade research at Banc of America Securities. "It's all up in the air," he deadpanned.